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Iflk
108th
CONGRESS
2nd Session
SENATE
I
1
REPORT
108416
THE 2004 JOINT ECONOMIC REPORT
REPORT
OF THE
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATESt
ON THE
2004 ECONOMIC REPORT
OF THE PRESIDENT
Together with
MINORITY VIEWS
November 18, 2004 -- ordered to be printed
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON: 2004
JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304,
SENATE
Robert F. Bennett, Utah, Chairman
Sam Brownback, Kansas
Jeff Sessions, Alabama
John E. Sununu, New Hampshire
Lamar Alexander, Tennessee
Susan M. Collins, Maine
Jack Reed, Rhode Island
Edward M. Kennedy, Massachusetts
Paul S. Sarbanes, Maryland
Jeff Bingaman, New Mexico
79th
Congress]
HOUSE OF REPRESENTATIVES
Jim Saxton, New Jersey, Vice Chairman
Paul Ryan, Wisconsin
Jennifer Dunn, Washington
Phil English, Pennsylvania
Ron Paul, Texas
Fortney Pete Stark, California
Carolyn B. Maloney, New York
Melvin L. Watt, North Carolina
Baron P. Hill, Indiana
JEFFREY L. SCHLAGENHAUF, Executive Director
CHRISTOPHER J. FRENzE, ChiefEconomist to the Vice Chairman
WENDELL PRIMUS, Minority StaffDirector
ii
LETTER OF TRANSMITTAL
November 18, 2004
HON. BILL FRIST
Majority Leader, U.S. Senate
Washington, DC
DEAR MR. LEADER:
Pursuant to the requirements of the Employment Act of 1946, as amended,.I
The analyses and
hereby transmit the 2004 Joint Economic Report.
conclusions of this Report are to assist the several Committees of the
Congress and its Members as they deal with economic issues and legislation
pertaining thereto.
Sincerely,
ROBERT F. BENNETT
Chairman
iii
CONTENTS
OVERVIEW OF CURRENT AND RECENT MACROECONOMIC
CONDITIONS .............................................
VICE CHAIRMAN'S STAFF REPORT ON MACROECONOMIC
CONDITIONS .............................................
1.
11
RANKING MINORITY MEMBER'S VIEWS ................................. 23
Overview ..........................................................
24
The Bush Economic Record............................................ 25
Misguided Republican Policies......................................... 36
Conclusion............................................
49
LINKS TO MINORITY REPORTS .......................
V
50
SENATE
108T CONGRESS
2nd Session
REPORT
108-416
5
THE 2004 JOINT ECONOMIC REPORT
November 18, 2004 -- ordered to be printed
MR. BENNETT, from the Joint Economic Committee,
submitted the following
REPORT
together with
MINORITY VIEWS
Report of the Joint Economic Committee
on the 2004 Economic Report of the President
OVERVIEW OF CURRENT AND RECENT MACROECONOMIC
CONDITIONS
The nation will enter 2005 with an economy that is expanding at a
robust pace. During much of this year, some argued that the outlook
for the U.S. economy was bleak and that a reversal of the policies of
the last four years was necessary. The facts show otherwise:
* The U.S economy displayed continued strong growth in 2004.
Labor markets improved significantly relative to the past few
years.
* Businesses have added 2.0 million new jobs to their payrolls
during the first ten months of 2004. More than 2.2 million jobs
have been added to payrolls over the past 14 months through
October 2004.
* Economic activity in the manufacturing sector improved and
activity in the services sector remained vibrant.
* Assisted by continued low mortgage interest rates, housing
markets remained especially vibrant over the past year.
2
* Consumer and business investment spending-which provide
large contributions to the size of the gross domestic product
(GDP)-remained resilient, spurred by tax relief enacted in
earlier years and low interest rates.
* Partly because inflation and inflation expectations remained
well contained, interest rates have not changed significantly
since last year. Energy prices increased significantly during
2004 because of geopolitical uncertainties and low inventories.
Some raw commodity prices also showed some marked
increases, partly because of strong demand from China and
India. Despite rising energy and commodity prices, inflation in
consumer prices remains low by historical standards.
Between the third quarter of last year and the third quarter of 2004,
quarterly GDP growth, expressed at an annualized rate, has averaged
3.9%, a very strong pace of growth. Private forecasters continue to
expect further job gains and strong, sustainable growth through 2005.
The Federal Reserve, recognizing the sustained and strong growth in
the economy, significantly improved labor markets, the resilience of
the economy, and its ability to absorb rising energy and commodity
prices, began to remove its accommodative policy beginning in June
2004 by raising its target for overnight interest rates.
We are encouraged by the direction the economy is heading in terms of
growth and opportunity. This does not mean that the economy does
not or will not face challenges in the months and years ahead, but it
does mean that recent economic policy decisions are beginning to pay
dividends for the nation's citizens.
The Economy Ended 2003 with Strong Momentum
Last year closed with the economy growing in the fourth quarter at a
robust 4.2% annual rate and productivity growing at a 3.1% annual
rate, well above long-run averages. The unemployment rate in
December 2003 was 5.7%, lower than the recent peak of 6.3% in June
2003, and below the average unemployment rates of the 1970s, 1980s,
and 1990s. Monthly changes in payroll employment began to turn
positive in September 2003 and job gains continued throughout the
remainder of the year.
Inflation remained benign at the close of last year. This allowed the
Federal Reserve to keep short-term (overnight) interest rates at the 45year low of 1.0%. Both short-term and long-term interest rates
remained very low by historical standards.
3
The Federal Reserve's policy of accommodating strengthening.
economic growth combined with tax reduction played key roles in
stimulating growth through the end of last year and into 2004. Low
interest rates and tax relief helped sustain both consumer and business
investment spending and to accelerate economic activity in both the
manufacturing and the service sectors of the economy throughout the
second half of 2003. Tax relief and low interest rates also kept housing
market activity and refinancing at very high levels.
Economic Activity Remained Robust in 2004
Growth in GDP accelerated to 4.5% in the first quarter of 2004, from
4.2% in the previous quarter. Growth continued at more sustainable
rates of 3.3% and 3.7% in the second and third quarters, respectively.
Many analysts viewed the decline from the 4.5% first-quarter growth
to 3.3% growth in the second quarter, along with- moderatingemployment gains and declines in some other economic variables, as a
The
temporary soft patch in an ongoing economic expansion.
GDP
growth
expansion regained traction in the third quarter as
accelerated to 3.7%, the 1 2th consecutive quarter of growth.
Economic Growth Remained Robust in 2004
(Inflation-adjusted GDP, % change, annual rate).
~~~8
%I
6%
:
Li
-2%
2000
2001
2002
2003
2004
Source: Bureau of Economic Analysis
Consumer spending, which accounts for.over two-thirds of economic
activity, fueled much of the growth through the first three quarters of
2004, driven by gains, in wages, salaries, and after-tax.: income.
Growth in inflation-adjusted consumer spending rose 4.1% in the first
quarter of 2004, ebbed to 1.6% in the second quarter, and then
accelerated sharply to 4.7% in the third quarter. Despite strong
consumer spending during the past several years, household debt
burdens have not risen markedly. Indeed, householddebt burdens
4
remain below a recent peak that occurred in the fourth quarter of 2002.1
Moreover, household assets, which are almost 500% of GDP, continue
to heavily outweigh home mortgage debt and consumer credit, each of
which is well below 100% of GDP.
, _
__
_
_
_
___
___
_______
7
Growth in Consumer Spending
(Inflation-adjusted personal consumption
expenditures, % change annual rate)
8
6
3
2
2001
2002
2003
2004
Source: Bureau of Economic Analysis
Following enactment of the 2003 tax reductions, investment growth
also contributed substantially to overall GDP growth during 2004.
Inflation-adjusted private fixed investment grew by 4.5% in the first
quarter, 13.9% in the second quarter, and 8.5% in the third quarter.
Investment remained strong, growing by nearly 9.0% during the first
three quarters of 2004.
Growth in Private Fixed Investment Spending
.(inflation-adjusted, % change annual rate)
20
15
-10
-15
2000
2001
2002
2003
2004
|Source: Bureau of Economic Analysis
1 The household debt burden measure is financial obligations as a percentage
of disposable income, as measured by the Federal Reserve. Financial
obligations include payments on mortgage debt, rent, auto leases,
homeowners' insurance, and property taxes.
5
Labor Markets. Strengthened.in 2004.
Fourteen consecutive months of payroll job gains have added more
than 2.2 million jobs to business payrolls. There were gains in payroll
employment in each month of 2004 through October. The average
monthly gain in payroll jobs through October has. been roughly.
180,000; above the threshold that many believe must be crossed for jobcreation to exceed growth in the population.
Labor Markets-Strengthened.in 2004
(Change in.employment, SA, in thousands)
I
400
- - --- -
-
-
-- - -
- -
---
--
---
3 00
II.3200
I-~~~~~~~~~~~100
-2~~~~~~00
- -200
--- - -- -- -- -- -- -- -- -- -- -- -- -- ----July October
Apr
Oct
Jan
Apr
Jul
Jan
2004
2003
Source: Bureau of Labor Statistics
The unemployment rate in October 2004 was 5.5%, below the 5.7%
rate at the end of 2003 and a lower rate than the recent peak of 6.3% in
June 2003. The current. unemployment rate is below the average
unemployment rates of the 1970s, 1980s, and 1990s.
6
Unemployment Rate Remains Low
(Civilian unemployment rate, SA)
C1
10.8%
l
7./Pe
i37-8%0/
I 54;21-iA
~
1988
~
~
I
1980
1984
1988
1992
Source: Bureau of Labor Statistics
~~curre~t.55
~
.J
8%
+
~
4
8
~0%
1996
2000
2004
Gray bars denote recessions
J
Rapid Productivity Growth Continues
Productivity growth remained high during the first half of 2004. Output
per hour in the nonfarm business sector has increased at an annual rate
of more than 5.0% since the end of the recession, well above the 2.0%
average of the 1990s. Such a rapid pace of productivity growth has not
been seen since the 1960s. In the long run, productivity growth boosts
business profits, increases wages, and improves living standards.
Business Activity Remained Vibrant in 2004
Economic activity in both the manufacturing and the service sectors of
the economy remained strong during 2004, according to surveys by the
Institute for Supply Management. As of October 2004, manufacturing
activity has increased for 18 consecutive months while activity in the
services sector has increased for 19 consecutive months. Capacity
utilization in the industrial sector remains low by historical standards,
hovering around 76%. Despite remaining below the 82% to 83%
levels seen in the late 1990s, utilization trended upward through 2004.
The Housing Market Remained Strong in 2004
New home sales and existing home sales trended up as mortgage
interest rates remained relatively low in 2004. Levels of sales
remained very strong throughout the year, boosted by mortgage interest
rates that are still well below 6.0%. The pace of existing home sales
set new record highs in May and June of 2004, while the pace of new
home sales remained very strong through the year. The continued
blistering pace of home sales in 2004 pushed the nation's
homeownership rate to a record high of over 69% during the year.
7
Energy and Raw Commodity Prices Remain Elevated
Energy and many other commodity prices rose sharply in 2004, but
eased somewhat toward the end of the year. Gasoline prices reached
new highs during the year; crude oil prices rose-above-$50 per-barrel;
and natural gas prices remained high by historic standards. After
adjusting for inflation, however, energy prices are still lower than the
price spikes of the 1970s and early 1980s. Prices of many raw
commodities, such as scrap steel and imported steel coil, rose
significantly during 2004, as did overseas shipping rates. Substantial
increases in many commodity prices and shipping rates partly reflected
the significant demand from China and India for raw materials.
Inflation Has Accelerated Slightly, but Remains Low
Consumer price inflation, measured by the year-over-year percent
change in the consumer price index (CPI), remains well contained.
CPI inflation was 3.2% in October 2004, very low by historical
standards but an increase from CPI inflation of 1.8% at the end of
2003. Inflation in producer prices, -measured -by the year-over-year
percent change in.the producer price index (PPI) for finished goods,
was 4.4% in October 2004, an-increase from around 4.0% PPI inflation
at the end of 2003.
Most of the acceleration in inflation has been due to volatile energy
prices. Accelerating inflation in crude materials costs facing producers
also partly explains the increase in producer price inflation. The "core"
rates of inflation, which exclude food and energy prices, remain
relatively low, but have also accelerated during 2004. -Inflation in the
core CPI was 2.0% in October 2004, -up from core CPI inflation of
1.1% at the end of 2003. Core PPI inflation has also -accelerated-to
1.7% in October 2004 from 1.0% at the end of 2003. The core
personal consumption expenditures deflator, regarded by many as a
superior indicator of inflation, remains relatively low.
The Federal Reserve Began to Increase Short-Term Interest Rates
in 2004, but Long-Term Interest Rates Remain Low.
In May 2004, the Federal Reserve warned of impending increases in its
target short-term interest rate-the federal funds rate, which is the
inter-bank overnight lending rate-from the 45-year low of 1.00% that
had been in place for nearly a year. With low inflation and signs that
the economic expansion was fairly firm, the Federal Reserve believed
it could move away from its policy accommodation at a measured
pace. Policy accommodation refers to a policy of keeping interest rates
very low to accommodate economic growth. The Federal Reserve's
8
signal that accommodation could be phased out at a measured pace was
a signal that short-term interest rates would be pushed up in small
incremental steps.
In June, the Federal Reserve increased its target for the federal funds
rate by one quarter of one percent, from 1.00% to 1.25%. This was
followed by identical increases in July, September, and November.
Thus, by November the Federal Reserve had pushed its target federal
funds rate up in small incremental steps from 1.00% to 2.00%.
Convinced that the economic expansion, despite a spring soft patch,
was on solid footing and that inflation remained low, the Federal
Reserve has moved gradually.
Despite the increases in short-term interest rates, long-term interest
rates have not risen substantially over the year. Part of this is because
long-term inflation expectations remain low, so lenders have not
increased the premium they demand as compensation for perceptions
that inflation will rise in the long term. Long-term interest rates remain
low by historical standards, including mortgage interest rates.
Lending Conditions Eased in 2004, but Stock Markets Were
Essentially Flat
Interest rates on corporate bonds were somewhat high relative to rates
on less risky government securities as 2004 began.
After the
dissipation of some geopolitical uncertainties and uncertainties about
the durability of the economic expansion, lending conditions eased.
One sign of dissipation of uncertainty about the durability of the
expansion is that senior loan officers reported increased loan demand
by businesses toward the end of 2004-a sign of-business optimism
about the future. Loan officers also reported an easing of lending
conditions toward the end of 2004-a sign that lenders were more
optimistic about the economy and the geopolitical situation.
After a huge advance in 2003, stock prices have traded in a relatively
narrow range during most of 2004. It is difficult to explain stock price
movements, but it may be that rapidly rising energy costs are weighing
on the profit outlook of investors, even as optimism has increased
regarding the general outlook for the economy during the year. Since
the beginning of 2004, the Dow Jones Industrial Average is essentially
unchanged and the NASDAQ is up by approximately 4.0%.
9
International Developments
In 2003, the yen appreciated by close to 10% vis-A-vis the dollar: In
the first few months of 2004, Japanese authorities intervened heavily in
foreign exchange markets in attempts to drive the dollar price of the
yen down, which would make Japanese goods less expensive to U.S.
consumers. During that period, the yen did indeed depreciate vis-A-vis
the dollar. Japanese authorities abandoned that strategy later in the
year, and the yen depreciation seen in the early months of 2004 was
erased by periods of yen appreciations. On net, the yen appreciated
(which is the same as saying that the dollar depreciated) by around
2.0% as of mid-November.
In 2003, the dollar depreciated by almost 17% vis-A-vis the euro. In
contrast, the dollar has depreciated vis-A-vis the euro by only around
3.3% between the beginning of 2004 and mid-November.
Appreciation of the dollar early in the year was erased by depreciation
that began in the autumn of 2004.
Many believe that further depreciation of the dollar will be necessary
given that the trade deficit is large and growing relative to GDP. A
declining dollar makes imports more costly and less competitive in
U.S. markets and makes U.S. exports more competitive in world
markets. However, economic weakness abroad has hampered exports,
contributing to U.S. trade deficits.
Trade deficits have helped fuel a historically high U.S. current account
deficit of slightly over 5.0% of GDP. The current account deficit
means that U.S. savings are not sufficient to fund U.S. investment; on
the other hand, it also reflects the fact that investors abroad continue to
view the U.S. as a particularly attractive place to invest.
The Federal Budget
The federal budget deficit reached $422 billion, or 3.6% of GDP, in
fiscal year 2004. While this deficit is the largest ever in dollar terms, it
is still lower as a percentage of GDP than those experienced in the 1980s
and the early 1990s. The recent swing in the government's fiscal
balance has been primarily caused by the economic slowdown and
recent spending growth due to increased homeland security measures
and two wars. Despite the recent swing, publicly held federal debt
remains well within historical levels. The primary force necessary to
eliminate existing budget deficits is sustained, strong economic growth.
10
Debt Within Historical Levels
(Publicly held federal debt as a percent of GDP)
I-~~~~~~~~~~~120,
100
- -- -- - - -- - - - - - - - -
- - - - 80
60
,,, .
1940
1950 1960
1970 1980
| |
1990 2000 2010
~20
Source: Office of Management and Budget
Dotted line are CBO's baseline projections
The Outlook
Recent economic data provide confirmation of the remarkable
resilience of the U.S. economy. After weathering a sequence of
negative shocks including the tragedy of September 11, 2001,
corporate accounting scandals, rapidly rising energy prices, and two
wars, the.economic expansion that has been in place since November
2001 continues at a robust pace.
Boosted by monetary policy that remains very accommodative toward
growth and well-crafted tax relief, economic growth remains robust.
Of course, some risks and uncertainties remain. Energy and some
commodity prices remain elevated. The economies of Europe, Japan,
and other trading partners remain weak, limiting markets for U.S.
goods, though there have been positive signs that growth in those
economies will pick up. The global risks of terrorism and unrest in the
Middle East also remain.
Despite our nation's challenges,
American economy's ability to
opportunities for all Americans.
and regulatory burdens do not
creation.
we maintain our confidence in the
expand and provide improved job
We must work to insure that fiscal
hinder economic growth and job
SENATOR ROBERT F. BENNETT,
Chairman
REPRESENTATIVE JIM SAXTON,
Vice Chairman
I1
VICE CHAIRMAN STAFF REPORT
MACROECONOMIC PERFORMANCE SINCE 2000
Introduction and Summary
This paper reviews events and highlights debate surrounding U.S.
The booming, "new
macroeconomic performance since 2000.
stock prices and
when
1990s,
late
the
of
economy" period
sharply, is
increased
net
worth
consequently investment and household
examined and found to be unsustainable. This period is associated
with a behavioral response to this stock price inflation. This response
took the form of commitments or debt obligations as well as increased
risk taking that, during the period of asset price inflation, seemed
perfectly appropriate. Unfortunately, however, during this boom
period the ground work was laid for future painful, protracted
economic adjustments and lengthy subpar economic. performance
following the decline of asset prices.
When the stock market "bubble burst" early in 2000, conditions
deteriorated dramatically. Balance sheet distortions became evident as
asset (stock) prices fell but the value of nominal debt remained
unchanged, inducing net worth to decline.- As a result, a host of
economic variables (e.g., investment, industrial production,
manufacturing activity, employment, real GDP, consumption, net
wealth) began to slow or even decline. Notably, the slowdown of these
variables was underway in the Summer of 2000: i.e., before the change But the adjustment . to repair balance sheet
in administration.
deterioration was not rapid. These adjustments can take many months,
if not years, to complete. In short, the "seeds were sown" during the
booming "New Era" period. of the late I990s for a lengthy, subpar
period of growth. The associated lengthy adjustment process was
inherited by the new Administration when it took office in January
2001.
After reviewing these relevant events in more detail, the paper
In particular, the paper
discusses important policy questions.
establishes three key points about policy:
(1)
The paper shows that assertions associating the subpar
economic perfornance in early 2001 with the policies of
the newly inaugurated administration are misleading and
inaccurate for a number of reasons. The data clearly show
12
(2)
(3)
that an economic slowdown was underway following the
stock market bubble burst in early 2000. A number of
important economic variables were clearly slowing by midyear 2000, well before the January 2001 inauguration date.
Furthermore, well-known policy lags imply that the
impacts of the new administration's economic policies
could not have been observed until mid-2001 at the
earliest: i.e., the economic effects of these policies could
not have occurred until after the commencement of the
2001 recession. 2 The previous administration's own CEA
Chairman and Nobel Prize winner Joseph Stiglitz (among
others) explicitly recognized that "the economy was
slipping into recession even before Bush took office,"3 that
seeds for an economic slowdown were sown during the late
Clinton years, and that any new administration (like
Bush's) necessarily inherits economic problems spawned
previously.
Careful analysis shows the boom years of the late 1990s
laid the groundwork for an inevitable, lengthy economic
adjustment during the period following the stock market
decline. Because of the timing of this stock market
decline, these necessary adjustments were pushed into
2001 and 2002: i.e., into the new Bush Administration.
The healthy economic rebound in late 2003 and 2004
provides further evidence that once the administration's
economic polices were allowed to take root, they boosted
economic performance and were not the cause of earlier
economic sluggishness.
The Late 1990s' "New Era" Economy
-During the late 1990s, economic activity was robust.
The
macroeconomy was experiencing the longest economic expansion on
record.
This record-breaking expansion followed the 1980s'
expansion, so that the U.S. economy experienced back-to-back two of
the longest economic expansions in U.S. history. Although there was a
recession in the 1980s, it was short and mild. Accordingly, optimism
about control of the business cycle and a more certain future was
The 2004 Economic Report of the President analyzed the revised data and
concludes that the recession actually began in the fourth quarter of 2000. (See,
Report, pp.30-1.)
3Joseph Stiglitz, "The Roaring Nineties" Atlantic Monthly, October 2002, p.
2.
2
13
prevalent. Because economic downturns had become so infrequent and
mild since the early 1980s, and the current robust growth was viewed
as sustainable, the term "new era" was- increasingly used to describe
the period's economy. Additional ingredients of this "new era"
economy included rapid stock market increases, significant
technological innovations and -advances, the fall of communism,
increased globalization, and a more market-oriented Congress. 4
These events of the "new era" were associated with important
economic developments such as rapid investment (and capacity)
growth, (see Charts 1 and 2), rapid productivity growth, persistently
strong consumption and housing advances, net wealth gains, healthy
job growth, low unemployment rates, low inflation and interest rates,
and a strong dollar.
Chart 1
The Late 1990s: Sowing
the Seeds for -Future
Protracted
Painful,.
Economic Adjustments-
Ral Prate Nonresidenbal Fised nvestn-ent
-
%
Cn
-AnOR5
S. R. Beach,2omm
-
15
0
These economic- trends,
while impressive, were
In
unsustainable.
particular, the "New Era"
economy was associated
environment
an
with
where the behavior of
9
-
..
-10..
households, business, and.
changed.
Chart 2
Partly to take advantage
Cpacdy: Industry
government
of expected sustained
increased returns to stock
and
other
asset
price
gains, and partly because
of
the
perception
Pn-nalW7tu
A
of
5
5 . ...
4
/
..
-.
\.
...........
-.-.
.
4
improved balance sheets,
businesses,
households,
and government invested
2
and consumed more while
taking on commitments as
1.--~--j-~9189100120
.......
-
2
I
well as debt obligations.
Robert J. Shiller, Irrational Exuberance, Broadway Books, N.Y. 2001,
Chapters 5, 6.
4See
14
The 2004 Economic Report of the President (ERP) describes the
resulting structural imbalances as stemming from the rapid investment
growth in the late 1990s and resulting in rapid capital accumulation
and excess capacity. Stock market advances boosted both investment
(by lowering the cost of capital) and consumer spending (through
increased wealth effects), thereby promoting low savings rates.
Research by economist Ray Fair shows that the stock market boom
caused (1) increased investment (relative to output), (2) lower budget
deficits, and (3) lower savings rates. 5 In this environment, government
spending increased as government revenues advanced and constraints
on spending eroded. These actions were premised on the expectation
of continued sustainable robust gains in asset prices and the perception
that balance sheets had improved by some measures (e.g., business
debt/equity ratios) during this period. As long as asset prices continued
to advance, these decisions appeared to be reasonable. The assumption
of more debt obligations produced a financial system more vulnerable
to asset price disturbances. A sharp fall in asset prices, for example,
would adversely impact or expose balance sheets of households,
business, and government, and would force adjustments on these
sectors.
From the financial perspective, as stock prices advanced during the
1990s' new era boom, the (marked to market) balance sheets of
households improved significantly. Household net worth advanced as
liabilities fell relative to assets. Similarly, household debt service
burden (as a percentage of GDP) improved. At the same time, business
balance sheets improved. Business debt/equity ratios (on a market
value basis) fell, signaling improved business financial strength (see
Chart 3). Taking advantage of
balance
sheet
Chart 3
Non-faroNonfnancia.CorporateB-o. Credit Market Debt/EqoityRato
improvements,
business
assumed
more debt and
extended
commitments.
Stock
market
price
advances lowered the equity
cost
of
capital
and
encouraged
investment.
This
is
evident
as
investment grew relative to
67.5
.
-
....
67.5
.
.
-.
52.5
3
30 0 ..... 30.0
22.5 "
1 '1"'
1
i
"' 1 " ' t"'
1 " 2 1"'
GDP (see Chart 4.) Further,
5 See
... 6.0
Ray Fair, "Testing for a New Economy in the 1990s," Business
Economics, January 2004, pp. 43-53.
22.5
15
as government *revenues increased owing to economic and stock
market advances, the balance sheet of government improved. As
households, businesses, and -government recognized persistent,
significant improvement of their balance sheets, however, they began
to expect these gains to continue. Accordingly, their behavior began to
change; they began to take on additional debt and make commitments
premised on the belief of a continuation of stock market and asset price
gains. The growth of business debt increased materially (see Chart 5).
This increasedthe vulnerability of the financial system to future assets
price disturbances.
Chart5
Chart 4
No-fi...nCi1 BusinessLi.bi.i.eS:CreditMarketDebtGrotth
1~~~~~
7!
62.~~~~~~~~~~~~~~~~~~~~~~~~~~'R 06
12.75
.
.200
2
8
.
5
80
88
89
-
88
9
9 06
......
...
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....
. ..
12
8
.
..... ...
.
87,,
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.. . ....
.. .
.
20 .2
\03;
.......
,:
....
9: ..
9
12X
2
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/C
18
16
.2
12.W-
80"
~~~~~~~2
82
38
182!
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-.......
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In short, in the late 1990s the "the seeds were planted" for future
economic adjustment problems should asset prices deteriorate, That is,
the die was cast for painful protracted adjustments, which- are often
associated with extended subpar economic performance.
The Bubble Bursts
Various measures of the stock market indicate the stock market bubble
burst early in. 20006 (see Chart 6). Most -of these stock market
measures were falling sharply by spring 2000. Notably, most of the
decline of the NASDAQ composite index occurred before January
2001, prior to the inauguration of the new Administration. This sharp
market decline impacted the market's capitalization as well as the
balance sheets of key sectors- of the economy. It reduced, for example,
household net worth (wealth)-and adversely impacted business, balance
sheets (see Chart 7.) For purposes of brevity, this paper focuses on the
adjustment of the business sector.
The Dow Jones Industrial index, for example, peaked in January 2000,
whereas the NASDAQ composite peaked in March 2000.
6
16
Chart 6
Chart 7
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The business sector's debt/equity ratio, for example, had fallen through
most of the 1990s when the stock market was advancing sharply (see
Chart 3.) This occurred despite a rapid accumulation of debt by the
business sector (see Chart 5.) Nonetheless, during the "new era," a
falling business sector debt/equity ratio signaled improved financial
strength.
As asset prices fell sharply and the stock market "bubble burst" in early
2000, however, the business sector's debt/equity ratio began to
increase sharply: i.e., debt increased relative to equity, thereby
increasing businesses debt burden. In short, the financial strength of
corporate America deteriorated as business balance sheets weakened.
This deterioration elicited significant and protracted adjustments on the
part of business.
The requisite adjustments following an asset price "bubble-bursting"
are multi-dimensioned and complex. They involve adjustments in both
the economic and financial realms. These adjustments have been
underestimated by economists partly because stock market (and
wealth) variables have not been well integrated into many incomeexpenditure (flow) macro models of the economy. Further, these
adjustments occur only infrequently. The recent stock market bubble,
for example, was the largest in several generations.
The recent stock market "bubble bursting" episode affected a number
of sectors; its impact was widespread and it has not been assessed
comprehensively. Fair's research, one of the few empirical studies of
this episode, reminds us that recent stock price movements caused
changes in the savings rate, in the investment/GDP ratio, and in the
budget surplus, among other variables.
17
After the stock market peaked and began falling sharply in early 2000,
widespread slowdowns followed in a number of the economy's key
sectors. Significant slowdowns followed, for example, in the growth
of investment and to a lesser extent the growth in consumption. Stock
price declines, after all, directly translated into increases in the cost of
investment capital and into diminished wealth effects adversely
impacting consumption. Stock and Watson found that while many
traditional leading indicators failed to predict the 2001 recession, stock
prices correctly predicted that economic growth would slow. Further,
they showed that investment declines lead to falling manufacturing
Declines also occurred in the growth of real GDP,
output. 7
manufacturing and industrial production. Compared to earlier business
cycles, the slowdown was particularly pronounced in investment (and
The
consequently manufacturing) as well as- in employment.
employment weakness, however, was concentrated in manufacturing.
Requisite adjustments forced on these sectors were lengthy and
protracted; they sometimes lasted several years to work themselves out
of the system.
The adjustments foisted on the economy also have a financial
dimension. The asset price deflation associated with the "bubble
bursting," after all, is a financial event that impacts the balance sheet of
key -sectors of the economy and forces lengthy adjustments on these
balance sheets. Deflating asset prices may cause debt burdens to
increase and balance sheets to deteriorate. This, in turn, forces
downward adjustments in the growth of debt and business spending
(investment). Debt-equity ratios increase while debt accumulation
slows. Responding. to an asset price "bubble bursting" can involve a
lengthy adjustment process taking years to complete. - When such
adjustments occurred after 2000, they often reflected events that
occurred earlier, during the previous administration.
Implications for Policy
"Bubble-bursting" events have both economic and financial effects.
These effects are associated with lengthy, time-consuming, protracted
adjustments of key economic sectors and their balance sheets. In this
instance, adjustments - which were necessitated by the excesses of the
late 1990s - were foisted on the economy during the period following
the stock market decline, during late 2000 and the early years of the
Bush Administration. In short, the Bush Administration inherited these
7 See James H. Stock and Mark W. Watson, "How Did Leading Indicator
Forecasts Perform During the 2001 Recession?", Federal Reserve Bank of
Richmond Economic Quarterly Vol. 89, No. 3, Summer 2003, pp. 71-90.
18
lengthy, delayed adjustments. This does not imply that Clinton
Administration officials were responsible for, or acted to undermine
the early Bush economy, but rather that this bubble and its delayed
adjustment effects were sown earlier, before the Bush Administration
took office.
Having reviewed relevant economic circumstances surrounding the
events of the recent price "bubble," we turn to a discussion of related
policy issues. An understanding of economic and financial events
surrounding the bursting of the stock market bubble makes for better
policy evaluation.
This paper makes three policy-related points relevant in current
economic policy discussion. First, a frequent criticism of the Bush
administration policies has been repeated by various opponents of
those policies. Their contention is that following a "near perfect"
economic performance under the previous administration, the sluggish,
subpar macroeconomic performance recorded during the early years of
the Bush Administration was directly attributable to the adoption of
inappropriate Bush economic (tax cut) policies. That is, Bush
administration policies caused the subpar economic performance which
began in January 2001. A review of the circumstances surrounding the
"bubble bursting" episode clearly indicates that this argument is
factually incorrect for the following reasons:
Timing Inconsistencies: A host of key economic data series
shows that the macroeconomy began slowing shortly after the
stock market decline (or "bubble-bursting") in early 2000, well
before the change in administration in January, 2001. A
comprehensive list of economic data supporting this argument
is extensive. The list highlighted here is illustrative. Clearly,
the stock market (as measured by the Nasdaq composite) fell
sharply beginning in March 2000.8 Indeed, a forty-five percent
decline in the Nasdaq composite index took place prior to the
change in administration in January, 2001. This reduction
translated into losses in household net worth beginning in the
fourth quarter, 20009 prior to the Bush administration. Indeed,
the decline in net worth on a year-over-year percentage change
basis occurred in 2000 for the first time since flow of funds
data were collected in 1953. This decline was unprecedented
8 The
Dow Jones Industrial index peaked earlier.
flow of funds net worth data include contributions from homes.
9 These
19
and adversely impacted the growth of real consumption, which
slowed significantly from a better-than 5.5 percent annual rate
in the year prior to the stock market crash, to about the 3.3
percent range immediately after the stock market declined, but
before the change in administration.
The deflation of stock prices, of course, adversely affected
investment as well. A decline in stock prices raises the cost of
capital, thereby reducing investment. Business investment
growth, in fact, fell from double-digit rates in the year prior to
the crash to about 1.5 percent in the two quarters immediately
prior to the change in administrations. The investment decline
was concentrated in the equipment and software component.
With the growth slowdown of both investment and
consumption, real GDP growth slowed significantly as well.
In fact, real GDP growth declined from about a 4.7 percent
annualized rate prior to the stock market decline to a 0.8
percent annualized rate. in the two quarters immediately
preceding the change in administration.
Other key economic variables also follow this pattern; they
weakened after the stock market decline as well as prior to the
inauguration of January 2001. Industrial production, after
advancing for a considerable period, fell in both the third and
fourth quarter of 2000, after the stock market decline but prior
to January 2001. Manufacturing activity - as measured by the
Institute of Supply Management (ISM) index - began
contracting in August of 2000 and continued to contract until
well after January 2001. The same pattern is evident in
changes in payroll employment: i.e., gains in employment fell
from robust monthly advances to meager gains in mid-2000.
Notably, manufacturing employment had been declining since
March 1998.
In sum, most key economic variables began slowing shortly
after the stock market decline and well before the change in
The economy began
administrations in January 2001.
weakening, therefore, well before the Bush inauguration.
Consequently, a sluggish economy cannot be attributed to
Bush economic policies since the sluggishness predated the
Bush administration.
*
Policy Lags: It takes. time for policy to be implemented
and for it to take effect. A number of unavoidable lags
20
exist between the inauguration and recognition of the need
for new policy, the implementation of new policy, and the
economic impacts of that change in policy. Additionally,
when a new administration comes into power,
understandably, there is an "organization lag."
The combined duration of these various time lags is likely
(conservatively estimated) to be 6 months at a minimum.
Accordingly, the economic effects of the new administration's
economic policies could not have been observed until mid2001 at the very earliest. In other words, the earliest possible
impacts of new Bush policies could not have occurred until
after the 2001 recession had begun. Therefore, the sluggish,
weak economy (and recession) in the early months of the Bush
Administration cannot properly be attributed to Bush economic
policies.
*
Concessions by Opponents: A number of these views were
explicitly endorsed by certain economic spokesmen of the
previous administration.
President Clinton's own CEA
Chairman and Nobel Prize winner Joseph Stiglitz explicitly
recognized that "...The economy was slipping into recession
even before Bush took office....".. Stiglitz also noted that the
seeds for future economic retrenchment and slowdown were
sown during the Clinton years." Stiglitz stated, for example,
that "...in the very boom were planted some of the seeds of
destruction, seeds which would not yield their noxious fruits
for several years...""2 Further, Stiglitz recognized that any new
administration, like Bush's, inevitably inherits economic
problems it had nothing to do with. Such new administrations
have to "play with the hand they are dealt."' 3 The finishing
touch to this argument was added by the previous
administration's CEA member, Jeffrey Frankel:
As convenient as it would be for the
Democrats to be able to claim that Bush fiscal
policies caused the weak economy of the last
10 Joseph Stiglitz, "The Roaring Nineties," The Atlantic Monthly, October
2002, p. 2 of 1O. See also Joseph Stiglitz, The Roaring Nineties, Norton, NY,
2003,p.322.
" Ibid., pp. 9,219,3.
12 Ibid., p. 9, underline added.
1' Ibid., pp. 33, 322.
21
three years, good economic logic does not
support that contention. 14
Furthermore, it is relevant to note that newly released.
transcripts of the (detailed) FOMC minutes, indicate that the
Federal Reserve Board Chairman, several Federal Reserve
Bank Presidents,. and some senior. Board staff all recognized
recessionary indicators (especially. in manufacturing) as
early as 1998. '5
In sum, the argument that Bush administration economic policies
caused and are responsible for the sluggish, weak economy in the early
years of that administration is factually incorrect because of time
inconsistencies and the lags of economic policy. Further, key officials
of the previous administration conceded that this was the case. And
those concessions were (implicitly) corroborated. by observations of
Federal Reserve officials.
A second important-point related to assessments of the economy in
recent years is mentioned above: namely, that the Bush administration
inherited a number of economic problems from earlier periods. That is,
"seeds of destruction" were sown during the stock market boom of the
late 1990s. These "seeds of retrenchment" would yield their "noxious
fruit" only over an extended period of time (perhaps for several
years.)16
The bursting of the stock market bubble, for example, left distorted
portfolios in most sectors.of the economy, investment imbalances, andhousehold, net -worth losses requiring large,. protracted (multi-year)
financial adjustments to regain normal equilibrium. These required
protracted adjustments, in turn, adversely impacted several years of
economic growth in 2001-2003. In short, the effects of the various
imbalances associated with the late 1990s brought about adjustments
causing consumption, investment, and hence, economic activity to be
weaker than otherwise. These adjustments help to explain weakerthan-normal economic activity in 2001-2003.
Jeffrey Frankel, "It's a Tough Job to Create Jobs," Washing~ton Post,
Saturday April 11, 2004, p. B30. (Frankel was a member of President Bill
Clinton's Council of Economic Advisers from 1997 to 1999.)
15 See Federal Open Market Committee transcripts released in late April 2004
(after a five year embargo). See also, for example, Greg Kaza, "Clear Signs
of Deterioration," National Review Online, May 4, 2004.
16 See Stiglitz, op. cit., p. 9.
14
22
A third observation relating to the policy debate about macroeconomic
performance pertains to the recent improvements in economic growth.
In particular, the economy has expanded at a robust 4.9 percent
annualized growth rate over the last four quarters (an improvement
over more modest growth during the first seven quarters of recovery.)
Further, consensus forecasts of the economy project better-than 4
percent growth for the near-term future. This improved performance
provides further evidence that once the administration's economic
policy finally took root, it worked as anticipated. This vigorous
economic expansion indicates that the prescribed economic and tax cut
policies proved potent. These successful policies boosted the economy
and therefore were obviously not the cause of the earlier economic
sluggishness.
Summary and Conclusions
After reviewing economic and financial events influencing U.S.
macroeconomic performance since 2000, this paper establishes three
points related to economic policy. First, Bush administration policies
did not cause the subpar economic performance experienced
immediately after January 2001. Timing considerations and evidence,
recognized policy lags, and concessions by opposition economic
spokesmen support this contention. Second, the Bush administration
inherited a number of economic problems associated with the stock
market bubble and its various remnants. These problems were created
in earlier periods and left adjustments unfinished for later periods.
Third, the recent improvement in economic growth provides further
support for Bush economic policies. This recent economic performance
suggests that once Bush economic policies took root, they proved to be
potent and were not the cause of earlier sluggishness.
Prepared by Dr. Robert Keleher
23
RANKING MINORITY MEMBER'S
VIEWS AND LINKS TO MINORITY
REPORTS
24
RANKING MINORITY MEMBER'S VIEWS
I. Overview
For the fourth straight year of the Bush presidency, the
economy has underperformed expectations, leaving a large jobs deficit.
In October 2004, there were 1.3 million fewer private sector jobs than
there were when President Bush took office. There were 7 million
fewer jobs than the Bush Administration predicted there would be in its
first post-9/1 1 economic forecast in early 2002. This year, job creation
has been only slightly more than enough to keep pace with population
growth and has been only about half of what the Administration
predicted it would be as recently as February.
The consequences for ordinary Americans of this economic
failure are serious. After adjusting for inflation, median household
income has dropped over $1,500 during President Bush's term, 2.1
million more Americans are unemployed, 4.3 million more Americans
are living in poverty, and 5.2 million more Americans are without
health insurance.
The President and his Republican supporters in the Congress
have had one policy and one policy only to deal with this record of
poor economic performance-tax cuts. But those tax cuts have not
worked. They were ineffective at stimulating job creation in the short
run; they were unfair, going disproportionately to very high-income
taxpayers; and they were fiscally irresponsible, contributing
significantly to squandering the hard-won budget surpluses the
President inherited. As a result, we are left ill-prepared to deal with the
imminent retirement of the baby boom generation.
Meanwhile, other important national priorities have been
neglected or mishandled. For example, health care expenditures have
been increasing, and health insurance premiums, including Medicare
premiums, have been rising explosively. In 2005, some 2.1 million
seniors will have their entire Social Security COLA taken away by a
record increase in Medicare premiums. Seniors will have to wait until
2006 for prescription drug coverage under the Medicare law passed last
year, but the healthy and wealthy non-elderly benefit immediately from
the tax-advantaged health savings accounts (HSAs) created in the same
legislation. The President's preferred policy of tax deductions and tax
25
credits for health insurance carries a high budget cost; offers little to
the uninsured, and could undermine existing coverage.
The President's misguided proposals for Social Security would
weaken the financial condition of the program dramatically. The
private accounts he favors would cost $2 trillion or more to implement.
That would entail cutting benefits or raising taxes-or letting the
budget deficit grow even larger.
Unlike past presidents-including his father-President Bush
allowed the- federal extended unemployment insurance benefits
program to expire at the end, of 2003 when the number of long-term
unemployed and people exhausting their regular state benefits was still
high. In 2004, as long-term unemployment has-remained high, there is
no longer help for those workers.
Nor has there- been help for people struggling to escape
poverty. Welfare caseloads continued to decline, even as the number
of poor households experiencing the kind of economic hardship
traditionally addressed by welfare went up. But instead of recognizing
that serving fewer people at the same time that poverty is going up and
unemployment is high is a sign of failure, the Bush Administration has
perversely trumpeted welfare reform as a success.
With the economy still struggling to climb out of the most
protracted jobs slump since the 1930s, President Bush has the worst
jobs record of any president since Herbert Hoover. The President's
policies have not addressed the major problems. facing Americanfamilies today. and they have undermined our long-term fiscal health,
making it harder to confront tomorrow's challenges.II. The Bush Economic Record
A Protracted Jobs Slump
Net job destruction. The economy finally stopped hemorrhaging jobs
a year ago, but job growth since then has been weak. As a result,
through October 2004 there is still a substantial jobs deficit on
President Bush's watch. Driven by massive losses in manufacturing,
private sector payrolls have shrunk by 1.3 million jobs under President
Bush (Chart 1). There has been some net job creation in the
26
government sector, but the overall deficit in total nonfarm payrolls is
still nearly 400,000 jobs.
Chart 1
The recession that precipitated those job losses began in March
2001 and ended in November 2001. But payroll employment
continued to decline until August 2003. Both the ongoing loss of jobs
following the end of the recession and the fact that there is still a
substantial jobs deficit so long after the start of the recession are
unprecedented in business cycles going back to the 1930s. Focusing
on the post-World War II episodes for which we have consistent data,
the pattern of job loss and partial recovery in this latest business cycle
is very different from that of the average of all other post-World War II
cycles (Chart 2).
27
Chart 2
0
~
~
-
H
Average of postwar recessions
Typically, job losses in a recession end after 12-15 months and
the jobs deficit is completely erased within two years. Prior to the
current episode, the longest it took to get back the jobs lost in a
recession was 31 months for total nonfarm employment and 33 months
for private sector employment. That was in the 1990-91 recession and
the ensuing "jobless recovery." As of October 2004, it has been 43
months since the start of the recession, and the jobs slump persists.
Weak job growth in the past year. In each of its economic forecasts
going back to February 2002, the Bush Administration has been
projecting an imminent economic recovery with employment gains on
the order of 300,000 jobs per month. We are still waiting to see
sustained job growth anything like that. Much as the President wants
to tout the 2.2 million jobs created since August 2003, that figure
translates into just 159,000 jobs per month-about half of what the
Administration has been forecasting (Chart 3).
28
Chart 3
iSo
-
-EUs00l
300,000
159,000
In fact, a rate of 159,000 jobs per month is not much more than
enough to keep pace with the trend-rate of growth in the labor force for
an economy that is already at full employment. It is nowhere near
enough to restore the jobs lost in the recession and to employ people
who finally begin looking for work again after having stayed out of thelabor force when job prospects were poor. Those considerations are
reflected in the Administration's forecast of 300,000 jobs per month.
However, reality has fallen far short of that promise. Nonfarmn payroll
employment in October 2004 was 7 million jobs short of the
Administration's first post-9/11 forecast in February 2002.
Apologists for the Administration's poor jobs record
sometimes argue that the payroll employment data understate job
creation under President Bush. They point to larger job gains in a
different official survey, the survey of households. They also point to
expected revisions in the payroll numbers. Upon closer inspection,
however, those arguments are weak (Box 1). Most experts believe that
trends in the payroll employment data are the best indicator of job
creation, and the revisions are likely to be modest. Moreover, the
growth in employment reflected in the household survey is also much
weaker in the current business cycle than it has been in past recoveries.
29
Box 1
Are Job Losses Overstated?
The Bureau of Labor Statistics (BLS) has two different measures of
employment. One is based on a survey of nonfarm establishments
and asks employers how many jobs they have on their payrolls.
The other is based on a survey of households and asks people
whether or not they have a job.
While nonfarm payroll
employment has declined since early 2001, employment based on
the household survey has increased.
In theory, the household survey might be picking up sources of job
creation that are not captured by the payroll survey, but that does
not appear to be the case. Nor is the payroll employment data
seriously underestimating job creation in new businesses that are
not included in the establishment survey.
The payroll and household data differ in scope and coverage. For
example, the payroll data do not include those who say they are
self-employed, while the payroll data count each job of a person
holding more than one job. No one has fully reconciled the
differences between the two, but most experts, including the BLS,
the non-partisan Congressional Budget Office, and Federal Reserve
Chairman Alan Greenspan, believe that trends in the payroll
employment data are the best indicator of job creation.
If the payroll employment data were seriously underestimating job
creation in new businesses, that would show up and be corrected
early next year when the BLS releases its annual "benchmark"
revisions of the payroll data, which are based on information from
virtually all establishments.
However, preliminary evidence
released by the BLS in October suggests that the next revisions are
likely to be modest and would not materially affect the picture we
have of a long jobs slump and only a modest jobs recovery.
In summary, there is overwhelming evidence that President
Bush has presided over the most protracted jobs slump since the 1930s.
As a result, he has the worst jobs record of any President since Herbert
Hoover, and he has been the first President in over 70 years to preside
over a net loss of private sector jobs (Chart 4).
30
Chart 4
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Higher Unemployment and Reduced Labor Force Participation
The payroll employment data paint the clearest picture-of the
protracted labor market weakness in the U.S. economy since early
2001. But other data paint a similar picture of labor market weakness:
Unemployment remains high. The unemployment rate in October2004 was 5.5 percent. Those who would like to argue that the
economy is strong often suggest that this is satisfactory, based on the
average rate of unemployment over the past 30 years. But that
argument misses the point that such an unemployment rate is very
disappointing compared with the period immediately before President
Bush took office. October's 5.5 percent unemployment rate is 1.3
percentage points higher than it was when President Bush took office
and higher than it ever was during the entire four years of President
Clinton's second term. At 8.1 million, the number of people out of
work has increased by 2.1 million since President Bush took office
(Chart 5):
31
Chart 5
6.0
Labor force participation remains low. Labor market conditions are
actually weaker than the unemployment rate suggests, because the
unemployment rate fails to reflect the large decline in labor force
participation since early 2001. At that time, more than 67 percent of
the population aged 16 or over was working or looking for work. That
proportion declined as the economy shed jobs, but it has stayed low
even as payroll employment has started to grow again. At 65.9
percent, the labor force participation rate in October 2004 is the same
as it was in February 2004 and as low as it has been at any previous
time back to 1988.
People can leave the labor force for all kinds of reasons,
including going back to school or pursuing other activities outside the
labor market, but discouragement over job prospects appears to be a
major reason for the latest decline. That can be seen, for example, in
the BLS's alternative measures of labor underutilization. In particular,
the broadest measure, which includes people who want to work but
have given up looking and workers who have had to settle for part-time
work, was 9.7 percent in October 2004, 2.4 percentage points higher
than it was when President Bush took office.
32
The fraction of the working-age population with a job is down
Reflecting the combined effects of the rise in the
sharply.
unemployment rate and the decline in labor force participation, the
proportion of the working age.population with a job fell from 64.4
percent when President Bushl took office in January 2001 to 62.3
percent in October 2004. That translates into about 4.7 million-fewer
people working than would be working if the employment-population
ratio had stayed the same as it was when President Bush took office.
Long-term unemployment remains high. One final measure of
unemployment distress- is the proportion of those currently unemployed
who have been out of work for more than 26 weeks-the amount of
time a worker can collect regular unemployment benefits. That figure
has been above 20 percent for more than two years, the longest such
stretch since the late 1940s, when the Labor Department started
keeping track of such data.
A Squeeze on Paychecks
While workers .have endured the most protracted jobs slump
since the 1930s, the rest-of the economy has fared better. For example,
real (inflation-adjusted) gross domestic. product (GDP)-the broadest
measure of economic output-has been growing since the end of 2001.
The disparity between the output.market and the labor market is
explained by extraordinary growth in labor productivity (output per
hour). Thus far in the recovery, employers have been able to squeeze
more and more output from their workers without substantially
expanding their hiring. In particular; since -the start of 2001, output in
the nonfarm business sector grew at a 3.2 percent average annual rate,
even though hours worked declined at a 1.0 percent average annual
rate.
Productivity gains are not reflected in real.wages. Only a fraction
of the resulting strong productivity growth has; translated into higher
real earnings for workers. Although productivity has risen at a 4.2
percent annual rate since the start of 2001, real compensation per hour
(which includes not only wages and salaries but also benefits) has risen
at just a 1.4 percent annual rate. Moreover, benefits, including
employer contributions to health insurance, have been rising faster than
wages and salaries. When benefits are excluded, workers' take-home
pay has barely kept up with inflation. For example, the usual weekly
earnings of full-time workers grew just 0.2 percent per year faster than
33
inflation between the end of 2000 and the end of 2003. That compares
with a growth of 1.7 percent per year from the end of 1996 to the end
of 2000.
The President may think the economy has turned the corner in
2004, but workers are still waiting to see that reflected in their
paychecks. In the first nine months of this year, real average hourly
earnings are down 0.6 percent and real average weekly earnings are
flat.
Wages and salaries have reached a record low as a share of
national income. The combination of lost jobs and sluggish earnings
growth for those still working has caused the share of national income
going to compensation of employees (wages plus benefits) to fall by
over 2 percentage points since President Bush took office. That
translates into a current shortfall of roughly $215 billion. In other
words, if labor's share of national income had not fallen, workers
would be receiving $215 billion more in aggregate wages and benefits.
Focusing just on wages and salaries, workers' share of national income
is the lowest it has ever been in the more than five decades for which
we have data.
The flip side of the declining share of labor compensation in
national income in recent years has been a rising share going to
business profits. While the aggregate wages and benefits of workers
have increased just 13 percent (before taking inflation into account)
since President Bush took office, business profits have increased
almost 50 percent.
Falling Household Incomes, Rising Poverty, and Declining Health
Insurance Coverage
The consequences of a persistent weak job market for middle
and lower-income Americans have been serious. Two reports by the
Joint Economic Committee Democrats provide the details ("Poverty
Has Increased and Real Income Has Fallen since 2000", and "The
Number of Americans without Health Insurance Rose for the
Third Straight Year in 2003").
After adjusting for inflation, median household income fell
slightly to $43,318 in 2003. The median is the income of the household
at the exact middle of the distribution. Half of all households have
34
higher income and half have lower income. During the Bush years,
real median household income has fallen by over $1,500 (Chart 6).
With a continued weak labor market and stagnant real (inflationadjusted) wages, real median income is unlikely to bounce back much
if at all in 2004.
Chart 6
Overall, real median income has decreased by 3.4 percent
since the start of the Bush Administration. But that decline has not
been uniform across major racial and ethnic groups: median household
income declined. by 2.0 percent among non-Hispanic whites, by 6.3
percent among blacks, and by 6;9 percent among Hispanics.
Declines in household income have occurred across the income
distribution. The poorest. fifth of all households experienced the
greatest proportional decline in average real income (7.9 percent). The
average real income of-the richest fifth of all households fell by only
3.2 percent.
The number of Americans living in poverty increased by 1.3
million to 35.9 million in 2003, when the official poverty threshold for
a family of four was $18,810.
Since the start of the Bush
35
Administration, the number of Americans living in poverty has
increased by 4.3 million (Chart 7).
Chart 7
The poverty rate increased from 12.1 percent in 2002 to 12.5
percent in 2003. That made the total increase during the Bush
Administration 1.2 percentage points. In 2003, the poverty rate for
children under 18 years of age rose 0.9 percent to 17.6 percent, so that
more than one in six American children are now living in poverty.
Among major racial and ethnic groups, the poverty rate was 24.4
percent for blacks in 2003 and 22.5 percent for Hispanics.
Finally, the number of Americans without health insurance
rose for the third straight year to 45 million, 15.6 percent of the
population. Millions more spent part of the year uninsured. Since
2000, the number of uninsured has risen by 5.2 million (Chart 8).
More Americans are now without health insurance than in any year
with reported data, which go back to 1987.
36
Chart 8
,
_
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398
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37
Unfair. Ineffective, and Fiscally Irresponsible Tax Cuts
The President has pushed for and achieved a major tax cut in
each year of his term. Critics have argued that those tax cuts have
disproportionately benefited the richest American households. New
estimates by the Congressional Budget Office (CBO) of the
distributional impacts of the first three major Bush tax cuts confirm
that those tax cuts have been skewed toward the rich. That tilt toward
the rich also helps explain why the tax cuts have been remarkably
ineffective at stimulating job creation in the short run: effective jobs
stimulus requires generating new spending, while tax cuts for upperincome taxpayers are more likely to generate saving. Finally, if the
President is successful in his efforts to make these tax cuts permanent,
they will put a large hole in the federal budget for years to come.
The Bush tax cuts are skewed toward the rich. An analysis by the
JEC Democrats, "New CBO Analysis Confirms That the Bush Tax
Cuts Are Skewed Toward the Rich", finds that in 2004 the average
tax cut for the 1 percent of households with the highest incomes is
more than 70 times larger than the tax cut for middle-income
households (Chart 9). That calculation includes the tax cuts from
temporary investment incentives that expire at the end of 2004. But
even when those provisions are excluded, the tax cut for the top 1
percent of households is still 40 times as large as the cut for the middle
class.
Chart 9
78,459
7,740
250
800
1.090
1.770
38
The president has repeatedly justified tax cuts for the highestincome taxpayers as necessary to promote small businesses. But the
facts do not support this justification. According to IRS data, less than
3.5 percent of the 18.6 million small business tax returns for 2002
reported income of $200,000 or more, well below the income required
to reach the top two income tax brackets. In contrast, the Treasury
department claims that over 75 percent of tax returns in the top-income
tax bracket are from small business owners. But this claim.is highly
misleading.
The Treasury includes in its definition of "small business
owners" wealthy investors in small companies who may have little to
do with everyday operations. President Bush and Vice - President
Cheney both report income that would classify them as small business
owners according to the Treasury department definition. The Treasury
definition also includes CEOs and. other top executives of major
corporations who report trivial amounts of income from speaking fees
and other outside activities.
Using the Treasury definition but limiting it to taxpayers who
derive at least half of their income from business activities, the
percentage of small business owners among taxpayers in the top tax
bracket falls to 25 percent. Limiting the definition only to those who
derive more than half their income from owning their own business
and not from partnerships or small corporations, the percentage of
small business owners in the top tax bracket falls to about 5-percent.
The President and his supporters also argue that the rich
deserve larger tax cuts because they pay a larger fraction of the income
tax. While it is true that the income tax is progressive, the benefit to
the rich from the 2001-2003 tax cuts has been disproportionate. In
particular, in 2004 the percentage increase in after-tax income resultingfrom the tax cut is four times larger for the top 1 percent of households
than it is for the middle 20 percent of households (Chart 10).. Even
excluding the effect of the temporary investment incentives, the
percentage increase in after-tax income is still 21/2 times larger for the
top 1 percent of households.
39
Chart 10
10.1
5.2
2.4
2.3
2.6
The Bush tax cuts have been ineffective at creating jobs. Quite
apart from the unfairness of this distribution, the fact that the Bush tax
cuts have been skewed toward the rich has blunted their effectiveness
in stimulating job creation. The sheer magnitude of the Bush tax cuts
has provided some fiscal stimulus in the short run. However, with their
emphasis on cuts in marginal tax rates affecting upper-income
taxpayers, dividend tax relief, and repeal of the estate tax, the Bush tax
cuts have had a low jobs-stimulus "bang" for their fiscal cost "buck."
For example, the private forecasting firm Economy.com
estimates that three-fifths of the cost of the Bush tax cuts was in
proposals that generated 60 cents or less of additional spending per
dollar of revenue loss. That compares with alternative stimulus
policies more favored by Democrats such as extending unemployment
benefits ($1.73 of additional spending per dollar of revenue loss) or aid
to fiscally strapped state and local governments ($1.24).
The Bush tax cuts will have harmful long-run consequences for
interest rates and the trade deficit. Effective job-creating stimulus
should be fast-acting and concentrated at the time when the economy
has idle industrial capacity and unemployed workers who can be put
back to work. The tax cuts of the last few years, in contrast, have
40
much of their impact in the future. Once the economy is in a
sustainable economic recovery and producing close to its capacity,
fiscal stimulus from tax cuts is counterproductive. When the economy
is already producing all it can, the extra demand stimulated by the tax
cuts must be offset. by reduced demand elsewhere; Typically, this
means some combination of the following: a.tighter monetary policy,
which forces up interest rates and discourages productive investment;
increased purchases from abroad, which increase the trade deficit; and
increased foreign borrowing, which. inflates the value of the dollar and
discourages U.S. exports.
For most of the past few years, large federal budget deficits
have not had an appreciable effect on interest rates, because private
investment demand has been weak. However, the Federal Reserve has
begun to raise interest rates, and interest rates may well have to be
pushed higher than they would be if the budget deficit were under
control. Meanwhile, we have seen a continuing deterioration of the
trade deficit, which has been very disruptive to manufacturing and
other trade-sensitive industries. The current account deficit, which is a
measure of how much we are borrowing from abroad is now over 5
percent of GDP..
Individuals will feel the effect of higher interest rates directly
in their mortgages, car payments;-and student loans. Future standards
of living will be held down because we have not made investments that
raise productivity and wages. Ongoing interest obligations and the
need to pay off our foreign borrowing will come at the expense. of
future national income.
The Bush tax cuts have been fiscally irresponsible. The long run
economic harm from the Bush tax cuts arises from their impact on the
budget deficit and the national debt. The President's abandonment of
fiscal, responsibility has created a legacy of deficits and debt that is
vastly different from the situation he inherited. On President Bush's
watch, large projected surpluses have turned into large deficits (Chart
11). What in 2001 was projected to be a $397 billion surplus in fiscal
year 2004 has turned out to be a $413 billion deficit. In January 2001,
the.Bush Administration forecast that the federal debt would be paid
down to just $1.2 billion in 2008; in their. latest projection the 2008
debt is now expected to rise to $5.5 trillion (Chart 12).
41
Chart 11
Chart 12
42
No Compassionate Conservatism for the Unemployed or the Poor
In times of economic weakness, the social safety net is
supposed to cushion the economic blows to workers who lose their
jobs through- no fault of their own and to the economically
disadvantaged who struggle to find work to support their families. But
neither extended unemployment benefits nor welfare functioned as
well as they should have in the long jobs slump of the past four years.
Failure to continue federal extended- unemployment benefits. In
the past, the federal government has enacted extended unemployment
benefits-for those who have exhausted their 26 weeks. of regular state
unemployment insurance (UI). Those extended benefits were kept in
place until labor market conditions improved substantially. As usual,
federal extended unemployment benefits were enacted in the current
job slump, but they were less generous than in the past and were
terminated prematurely, as shown in the JEC Democrats' report, "Job
Loss in the 2001 Recession Was Greater Than it Was in thePrevious Recession but Federal Unemployment Insurance Was
Less Generous".
The President and the Republican Congress failed to renew the
federal extended benefits program at the end of last year. They did so
even though the economy. was still 2.5 million jobs in the hole and the
rate at which workers were exhausting their regular UI benefits was
still twice as high as it was when the program enacted in the 1990-91
jobs slump ended. As noted earlier, October 2004 was the 25th month
in a row that the long-term unemployed were 20 percent or more of the
total number of unemployed.
Failure to address the contradiction between declining welfare
caseloads and increased need. The Bush Adminstration and the
Republican Congress have shown a similar lack of compassionate
conservatism in- their treatment of Temporary Assistance for Needy
Families (TANF), the main income support program created by welfare
reform in 1996. As shown in the JEC Democrats' report, "TANF
Caseload Declines, Despite Rise in Poverty", the need for such
income assistance grew in the 2001 recession and subsequent jobs
slump. Poverty increased, especially among TANF's target population
of children and their families, and unemployment increased for women
who maintain families, leaving them with fewer opportunities to
43
support themselves. While other parts of the safety net expanded to
meet the increased need, cash welfare assistance did not.
The only response from the Bush Administration has been
continually to repeat the rhetoric that welfare reform is working. The
Administration refuses to acknowledge that decreased welfare receipt
during a period of increased need is a problem. Welfare reform was
supposed to increase economic self-sufficiency, not poverty-though
Many
many former welfare recipients still live in poverty.
policymakers had cautioned that the success of welfare reform could
not be judged solely by what happened in the strong economy of the
late 1990s, and that the real test would come in a recession. But
instead of addressing the problems that have been revealed by the
recession when it was time to reauthorize the program, the Republican
House of Representatives proposed an even more draconian approach
that would make the problems worse. Fortunately, that approach did
not become law.
No Compassionate Conservatism for the Elderly and Uninsured
The President's tax-cut dominated approach to policy has left
the country with an enormous fiscal deficit for years to come.
Meanwhile, we face the imminent retirement of the baby boom
generation, which will put enormous pressure on Social Security and
Medicare. In addition, the health care crisis is worsening, and the
number of Americans without health insurance is growing. As a series
of reports by the JEC Democrats have made clear, however, the
Republican approach to health and retirement issues fails to adequately
address any of these issues.
The Administration's tax and spending policies-not Social
Security and Medicare-have created the real fiscal crisis. The
latest annual reports from the Social Security and Medicare trustees
estimate that the 75-year actuarial shortfall in Social Security is equal
to 0.7 percent of GDP and the 75-year actuarial shortfall in Medicare is
equal to 1.4 percent of GDP. Those are projections that should compel
policymakers to address the needs of two vital programs for our
nation's seniors. However, the Bush Administration has instead
pursued policies that erode rather than improve, solvency, as detailed
in the JEC Democrats' report, "Keeping the Social Security and
Medicare Trustees' Reports in Perspective: The Administration's
Tax and Spending Policies Are the Real Fiscal Crisis".
44
In the near term, the Congressional Budget Office estimates
that every dollar of Social Security and Medicare surpluses over the
next 10 years will be used to meet other general fund budget
expenditures rather than reducing debt and strengthening our ability to
meet the demographic challenge posed by the retirement of the baby
boom generation. In the longer run, if Congress permanently extends
all of the Bush tax cuts and enacts politically necessary reforms to the
alternative minimum tax, the cumulative revenue loss will equal 1.8
percent of GDP over a 75-year period, an amount roughly the same
size as the combined Medicare and Social Security shortfalls (Chart
13). Tax cuts for the wealthy are clearly a higher priority for the Bush
Administration than preserving Social Security and Medicare.
Chart 13
The need to protect the Social Security COLA. Unlike most private
pensions and other forms of retirement annuity income, Social Security
benefits include an annual cost-of-living adjustment (COLA) that is
designed to compensate for increased costs of rent, gas, food, and other
living expenses. Unfortunately, rising health care costs and last year's
Medicare law threaten this valuable cost-of-living protection by driving
up Medicare premiums, which are deducted from most beneficiaries'
Social Security check.
45
In early October, the Bush Administration announced the
largest premium increase in Medicare history: 17.4 percent, or $11.60 a
month. Shortly thereafter they announced that the annual Social
Security COLA for 2005 would be 2.7 percent. For the average retiree
with a monthly Social Security check of $914, nearly half of the $25
per month COLA would be needed to cover the increase in the
Medicare premium.
The JEC Democrats' report, "Medicare Premiums are
Undermining the Social Security COLA-New Data shows Impact
by State and Congressional District", highlights Congressional
Budget Office estimates showing that next year, some 2.1 million
beneficiaries nationwide will have their entire COLA taken away by
the Medicare premium increase leaving nothing for price increases in
other goods and services. Almost 13 million beneficiaries will have
over 50 percent of their COLA absorbed by the Medicare premium
increase.
The report finds that beneficiaries in all states and
congressional districts would benefit from legislation proposed by
Democrats to limit the increase in beneficiaries' Medicare premiums to
25 percent of their Social Security COLA.
Another JEC Democrats' report, "Rising Medicare Premiums
Undermine the Social Security COLA: New Medicare Law Could
Cut Benefits for Some", shows that this year's experience is not an
aberration. Ongoing increases in health care costs and soaring
premiums under the new Medicare Prescription Drug Act will continue
to erode the COLA in years to come.
Failure to address the growing health care crisis. Health care costs
have risen sharply under President Bush and 5.2 million more
Americans are without health insurance. The Bush approach to health
care policy promises little relief, since it does not address the
underlying problems.
People lack health insurance because coverage is unaffordable
and often unavailable. Over 40 percent of the people without insurance
have household incomes under $25,000, and about three-fourths have
incomes under $50,000. About three-fourths of the uninsured between
the ages of 18 and 65 are working full- or part-time, but don't have
access to or cannot afford coverage through their employer. The
President's approach to addressing these problems is a variety of tax
deductions and credits that carry a high budget cost, fail to make health
46
insurance more affordable or accessible to the uninsured, and could
undermine existing coverage.
The first step in implementing the President's approach was
the creation of health savings accounts (HSAs), which allow people
with qualified high-deductible health insurance to open a taxadvantaged account for health care spending. HSAs were a last minute
addition to the Medicare Prescription Drug legislation passed last
year-though seniors are not even eligible to open an account.
HSAs are a costly tax subsidy to the healthy and wealthy. The
real losers from HSAs are those with lower incomes or chronic and
costly health conditions. Combined with the high-deductible insurance
coverage required to establish an account, HSAs have the potential to
jeopardize traditional employer-provided coverage, drive up insurance
deductibles, and raise out-of-pocket costs for working families.
The President's next step for moving people into high
deductible health insurance was a $25 billion proposal in his fiscal year
2005 budget that would add a tax deduction for high-deductible health
insurance premiums for taxpayers with health savings accounts. That
proposal failed to get enacted in this Congress, but Republicans are
unlikely to abandon their efforts to add this deduction.
A JEC Democrats' report, "The President's Costly Tax
Deduction for High-Deductible Health Insurance Offers Little to
the Uninsured and-Could Undermine Existing Coverage", shows
that the vast majority of uninsured families would get little or nothing
from such a new tax deduction. High-income healthy families with
HSAs could shelter more each year, but the new tax deduction for
health insurance premiums would be worthless to low-income families.
In the name of addressing the uninsured, the Administration
has also proposed health insurance tax credits to subsidize health
insurance coverage. However, the JEC Democrats' report,
"Administration's Health Insurance Tax Credit Proposal Fails to
Provide a Real Solution to the Uninsured", finds that the amount of
the credit would not put coverage within reach for low-income
families. In addition, it would encourage enrollment in a market that is
notoriously difficult to access and that offers coverage that is not only
inadequate but also expensive.
47
A tax credit works to expand health insurance coverage only if
several criteria are met. First, quality health insurance must be
available.
That means health insurance reform is a necessary
ingredient, yet the Bush proposal lacks any market reforms. Second,
the tax credit must be refundable. Otherwise, most of the uninsured
will not be able to benefit because their incomes are too low. Third,
people must be able to get the credit at the time they purchase the
insurance. Finally, the credit must be large enough to make health
insurance affordable.
The President's plan fails to meet these requirements. With
average employer-sponsored premiums at nearly $10,000 for a family,
his health tax credit would cover only a small fraction of the cost of
health insurance policies for most uninsured families (Chart 14). It
would do nothing to address the lack of access in the loosely regulated
non-group market, where premiums are even higher.
Chart 14
Privatization is not the answer for Social Security. Social Security
is one of the country's most popular and successful programs.
Currently 90 percent of people aged 65 or older receive some payment
from Social Security. About two-thirds of aged Social Security
beneficiaries receive at least half of their income from Social Security.
For about 20 percent, Social Security is the only source of income. In
48
2002, Social- Security kept 13.1 million elderly people from poverty.
Without Social Security the poverty rate among the elderly would have
been nearly 50 percent.
The Administration advocates replacing part of Social Security
with a system of personal saving accounts. Yet, as the final report-from
the President's. Commission to Strengthen Social Security
demonstrates, it is not possible to replace part of Social Security with
personal accounts and maintain the solvency of the program without
large transfers from general revenues or large cuts in Social Security
benefits.
Privatization would worsen Social Security's financial
position. Currently all projected Social Security revenues-are needed to
finance benefits promised to current and future retirees. Under the
main plan- developed by the Presidents Commission,. Social Security
would divert a portion of payroll tax revenues to individual accounts
while continuing to pay benefits to current retirees.. This would drain
$1.8 trillion from the Social Security trust funds in just;the next ten
years, and speed-up by two decades (from 2042 to 2021) the year in
which the trust funds are exhausted..
Privatization would reduce benefits_. for . future, retirees'
Compared with the benefits promised under- -current law, the
Congressional Budget Office estimates that the Commission's main
plan would cut the annual-benefit of an average earner retiring in,20.65
from $26,400 to $14,600-a benefit cut of.45 percent. This estimate
includes the individual account payout under privatization. Because
disability benefits and benefits for young survivors are based on
retirement benefits, deep cuts in retirement benefits would also cut
promised disability benefits and young survivor benefits by 48 percent
by 2075. These cuts would not be offset by payouts from individual
accounts because disabled workers and young survivors would not
have had enough time to accumulate contributions.
-
Privatization would also increase economic risks. The Social
Security program now provides retirees with a predictable benefit that
keeps pace with inflation, and is payable as-long as the person or his or
her spouse is alive. In contrast, the returns from personal accounts are
uncertain, depend upon the ups and downs of the-stock market, and are
not guaranteed to last for a lifetime.
49
IV. Conclusion
In 2004, the economy is still struggling to climb out of the
most protracted jobs slump since the 1930s. Four years of tax cuts
have failed to generate a strong and sustained jobs recovery, but they
have contributed to squandering the fruits of the strong economy and
fiscal discipline of the 1990s. The country faces the imminent
retirement of the baby boom generation with a legacy of large budget
deficits from the policies of the past few years. All President Bush and
his Congressional allies have to offer is more tax cuts and health and
retirement policies that will dig the deficit deeper without providing
meaningful solutions to the country's most serious problems.
51
Poverty Has Increased and Real Income Has Fallen since 2000
August 2004 (revised September 2004)
http://jec.senate.gov/democrats/Documents/Reports/povertyfactsheet26
aug2004.pdf
The Number of Americans without Health Insurance Rose for the
Third Straight Year in 2003
August 2004 (revised September 2004)
http://jec.senate.gov/democrats/Documents/Reports/healthinsurance26a
ug2004.pdf
New CBO Analysis Confirms That the Bush Tax Cuts Are Skewed
Toward the Rich
August 2004
http://jec.senate.gov/democrats/Documents/Reports/CBOtaxcuts 13aug
2004.pdf
Job Loss in the 2001 Recession Was Greater Than it Was in the
Previous Recession but Federal Unemployment Insurance Was
Less Generous
September 2004
http://jec.senate.gov/democrats/Documents/Reports/uisept2004.pdf
TANF Caseload Declines, Despite Rise in Poverty
October 2004
http://jec.senate.gov/democrats/Documents/Reports/tanfcaseloadoct200
4.pdf
Keeping the Social Security and Medicare Trustees' Reports in
Perspective: The Administration's Tax and Spending Policies Are
the Real Fiscal Crisis
March 2004
http://jec.senate.gov/democrats/Documents/Reports/trustees25march20
04.pdf
Medicare Premiums are Undermining the Social Security COLANew Data shows Impact by State and Congressional District
October 2004 (revised October 16th)
http://jec.senate.gov/democrats/Documents/Reports/colaprotectionbycd
19october2004.pdf
52
Rising Medicare Premiums Undermine the Social Security COLA:
New Medicare Law Could Cut Benefits for Some
July 2004
http://jec.senate.gov/democrats/Documents/Reports/colaprotection2 lju
ly2004.pdf
The President's Costly Tax Deduction for High-Deductible Health
Insurance Offers Little to the Uninsured and Could Undermine
Existing Coverage
February 2004
http://jec.senate.gov/democrats/Documents/Reports/hsas24feb2004.pdf
Administration's Health Insurance Tax Credit Proposal Fails to
Provide a Real Solution to the Uninsured
February 2004
http ://jec.senate.gov/democrats/Documents/Reports/hcrc5feb2004.pdf
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